Active share is a measure of how different a portfolio is from its benchmark. The more different it is, the higher the active share, which is expressed as a percentage.
“Say Apple was 1% of the benchmark and we owned 1.5% in our fund; that difference of 0.5% would go to the active share,” says Chris Ibach, a global portfolio manager for Principal Global Advisors in Des Moines, Iowa. His firm manages the Renaissance Global Equity Private Pool.
“If you add up all of those kinds of exposures in the portfolio, you get the total active share,” he adds. (Note that the actual calculation for active share is complex.) “In most cases, [our] global equity private pool will be above 70%, and [it’s typically] between 70% and 75%,” says Ibach. “Right now, it’s at 73% active share.”
“The reason it’s not at 100% is there are some very [significant] large-cap exposures in its benchmark that we tend to own most of the time, to make sure that we can deliver the beta along with the alpha,” says Ibach. As of June 30, 2016, the pool’s top holdings included Pfizer, Facebook and Cisco Systems—it was most heavily weighted in financials, IT and healthcare.
Active share is important because it highlights that you’re an active manager, he adds. “If it’s too low—say 10% or 20%—you’re more like an enhanced index manager. With a 70% to 75% active share, you ensure you’re getting active management in the portfolio.” Antti Petajisto, one of the developers of active share, pegs the cut-off at 60%.
Ibach reviews portfolio activity daily. “We want to get the active share as high as possible without sacrificing the characteristics of the benchmark that are important. It must also be as levered to our alpha process as possible.”